Ninth Circuit declines to debar lawyer from submitting claims to asbestos trusts

By Jessica Karmasek | Sep 25, 2017

PASADENA, Calif. (Legal Newsline) - This month, the majority of a federal appeals court panel refused to enforce an attorney’s agreement not to practice before federally supervised asbestos trusts, concluding it purportedly violates California law.

The U.S. Court of Appeals for the Ninth Circuit, in its Sept. 14 ruling, vacated the U.S. District Court for the Central District of California’s affirmance of a bankruptcy court’s order.

Asbestos trusts, created through the Chapter 11 bankruptcy proceedings of entities exposed to significant asbestos liability, can take steps to debar a lawyer suspected of submitting bogus compensation claims.

The case was heard by a three-judge panel of the Ninth Circuit, including circuit judges Milan D. Smith Jr. and John B. Owens and judge Edward R. Korman. Korman, a judge for the U.S. District Court for the Eastern District of New York, sat by designation. He dissented.

“The district court never addressed whether federal law governs this case, and it is unclear whether the district court was even aware that the Trusts contended that federal law controlled its decision,” Owens wrote for the majority. “This possible oversight is hardly the trial judge’s fault, as the briefs filed in the district court also failed to squarely argue that federal law controls. Fundamental questions of law should appear at the beginning of a brief, not thrown in at the end, and should be clearly made.

“Here, the district court easily could have concluded that the Trusts never made a federal choice of-law argument.”

California attorney Michael Mandelbrot, who has represented asbestos claimants for many years, appealed from the district court’s affirmance of an order that enforces a stipulated agreement between him and the J.T. Thorpe Settlement Trust, among others.

In law, a stipulated agreement is simply a meeting of the minds on a particular issue. Both parties agree, or stipulate, that there is no dispute concerning the specific matter involved. The stipulated agreement spells out the terms of the issue at hand, as well as stating the agreement of both parties.

A stipulated agreement may cover an entire legal issue, or only a portion of the legal issue, leaving the balance to be determined by negotiation or in court.

In this case, after two days of trial testimony, the parties agreed to settle the case.

In particular, Mandelbrot stipulated that the trusts acted reasonably in seeking to debar him and finding a pattern of him presenting unreliable evidence. He agreed to be permanently barred from submitting claims to the trusts. In exchange, the trusts agreed to not seek damages from Mandelbrot, and dismiss with prejudice their claims for equitable relief.

Days later, Mandelbrot sought to back out of the deal.

He argued California Business and Professions Code section 16600 and California Rule of Professional Conduct 1-500 rendered the settlement illegal because it restrained him from the practice of law.

California Business and Professions Code section 16600 provides that “every contract by which anyone is restrained from engaging in a lawful profession… is to that extent void.”

California Rule of Professional Conduct 1-500(A) prohibits a California lawyer from being “a party to... an agreement, whether in connection with the settlement of a lawsuit or otherwise, if the agreement restricts the right of a member to practice law.”

The bankruptcy court rejected Mandelbrot’s attempt to renege and the district court affirmed, prompting him to appeal.

However, the Ninth Circuit said in its majority opinion that further proceedings in the district court are warranted.

It remanded for the district court to decide whether federal or state law governed, including whether the asbestos trusts waived the argument that federal law governed and to decide the impact, if any, of the Ninth Circuit’s 2015 decision in Golden v. Cal. Emergency Physicians Med. Grp. In Golden, the Ninth Circuit held that assessing the validity of a settlement agreement is a question of state contract law.

The majority, in its eight-page opinion, said the trusts only “vaguely suggested” in the last two pages of their brief to the court -- “with little analysis or reasoning” -- that federal “public policy” prohibits the application of California law.

“That is usually not enough to preserve an argument,” the panel wrote, noting it ordinarily will not consider matters on appeal that are not specifically and distinctly raised and argued in an appellant’s opening brief.

Not to mention, the district court did not apply Golden to the settlement at issue, the majority said. But, as it pointed out, the bankruptcy court issued its order before the Ninth Circuit decided Golden.

“It may be, as the dissent suggests, that Golden has no application here because (1) federal law governs, or (2) the facts in this case differ materially from those in Golden,” the majority wrote. “But neither party adequately argued to the district court that federal law governs (and have hardly argued it to this court), and the district court never addressed the impact of Golden.

“Consistent with Golden, these calls are best for the district court to make in the first instance.”

Korman, in his dissent, wasn’t buying it.

The opinion of the district court and the chronology of the briefing there -- which, he contends, go without mention in the majority opinion -- undermines the suggestion that the district court never addressed the impact of Golden, he said.

Specifically, the record shows that Golden was decided on April 8, 2015, when Mandelbrot’s appeal from the bankruptcy court was pending before the district court.

On May 27, 2015, the Thorpe trusts -- the J.T. Thorpe Settlement Trust and the Thorpe Insulation Company Asbestos Settlement Trust -- filed a Notice of Supplemental Authority, or NSA, calling the district court’s attention to Golden.

“This submission, which included a copy of Golden, thoroughly argued that, ‘although the Golden decision does interpret section 16600, it does not lend any support for Mandelbrot’s appeal,’” Korman pointed out.

“Subsequently, on June 9, 2015, the Thorpe Trusts filed another NSA advising the district court that the Ninth Circuit had summarily denied defendant’s petition for rehearing en banc and certification to the Supreme Court of California.”

Mandelbrot, the judge noted, did not contest the argument of the trusts that Golden did not lend any support for his then-pending appeal from the order of the bankruptcy court.

“Mandelbrot did not even file any submission in response, thus conceding the argument of the Thorpe Trusts that Golden did not affect the validity of the settlement agreement,” Korman wrote.

“Under these circumstances, the district court judge had no need to expressly address Golden in her exhaustive and thoughtful opinion.”

Korman also contends that unlike the district court record in Golden, the record in this case is fully developed and includes findings of fact by the district court -- “another fact that the majority opinion ignores,” he added.

“Mandelbrot is not entitled to a second bite at the apple in the district court -- a bite that will cause the trusts to expend funds otherwise dedicated to those suffering from asbestos exposure and those who may suffer from it in the future,” the judge wrote in his dissent. “Nor does the remand here find any support from the fact that the panel in Golden ‘remanded the case with its relatively undeveloped record so the district court could order additional briefing or conduct further factfinding.’”

Korman said the case is not even close on the merits.

“There is no reason for the majority to kick the can down the road, not only with respect to the applicability of Golden but also to the issue whether the Thorpe Trusts ‘adequately argued to the district court that federal law governs,’” the judge wrote, adding that the Ninth Circuit’s resources currently are “strained to the breaking point.”

“We do not enjoy the luxury of a game of ping pong with the district court, especially in a case where a party seeks to wriggle out of a settlement agreement made two days into a trial that was not going his way.”

Mandelbrot, in a recent blog post, said the Ninth Circuit’s ruling was “a long time coming.”

“Everyone knows I have never filed an unreliable claim and in fact, my office files the most thorough and reliable claims in the country,” he wrote. “These fraudsters tried to wipe out the ‘whistleblower’ (me) through a sham lawsuit, sham audits, judicial bias and bad faith -- while misappropriating millions of dollars of victims funds in the process.

“This victory in the appeal of the bad faith lawsuit... is one step towards justice. Justice for me. Justice for my office. Justice for my family. And justice for all victims of asbestos diseases.”

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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